The ALRC Final Report on Class Actions and Litigation Funding: Six things NZ insurers should know

In January 2019, the Australian Law Reform Commission released its Final Report on Integrity, Fairness and Efficiency: An Inquiry into Class Action Proceedings and Third-Party Litigation Funders.

New Zealand lags behind Australia and other influential common law jurisdictions in having no established legal framework to govern procedure in true “class actions”. The “representative action” procedure permitted by High Court Rule 4.24 (a 19th century rule), as it has been developed by the courts, is creaking at the seams and lacks the mechanics to grapple adequately with the minefield of issues that frequently arise in complex group litigation.

Change is coming. A New Zealand Law Commission review, currently on hold due to resourcing and other projects taking priority, will look into the current state of NZ law on class actions and litigation funding. When it does, it will draw upon the work of the ALRC.

Australia has more than 25 years’ experience with a developed class action regime. From a law reform and policy design perspective, there is much to be learned from the Australian experience. Not everything that the Australian regime has fostered is to be encouraged here. A number of the issues identified by the ALRC in its second-generation review and the measures it has proposed seek to ameliorate the undesirable design features of the Australian class actions regime. These will offer food for thought for the NZ Law Commission looking at class actions and litigation funding.

Why should NZ insurers pay attention?

  1. Australia has experienced significant growth in class actions and litigation funding. Shareholder (known as “stock-drop”) claims against company directors have been the dominant type of class claim, often engaging D&O insurance policies. This has impacted on premiums and the availability of cover. Claims1. Australia has experienced significant growth in class actions and litigation funding. Shareholder (known as “stock-drop”) claims against company directors have been the dominant type of class claim, often engaging D&O insurance policies. This has impacted on premiums and the availability of cover. Claimsof other types have been brought as class actionsas well and the nature of those claims will have engaged other insurance products. NZ insurers could find themselves on risk for claims of a similar nature. The scale of potential liability is large.
  2. Particular features of the Australian regime have encouraged an active third-party litigation funding market. Litigation funders are currently largely unregulated in both New Zealand and Australia, although Australia has more controls than New Zealand through its procedural rules and judicial supervision over class action settlements. The ALRC’s consideration of regulation for litigation funders takes Australia several steps beyond where NZ is currently, and whilst the ALRC has not gravitated towards a litigation funders licensing regime, the ALRC recommended a number of measures in lieu of it.
  3. Many insureds operate trans-Tasman businesses. Conduct in some cases (e.g. consumer protection claims, cartel damages claims, or product liability claims) could extend across both jurisdictions.
  4. Group litigation in New Zealand is growing gradually, even in the absence of a supportive legal framework. Group cases are here to stay and are among the most complex and challenging litigation for the parties and the courts to manage.
  5. There is an interplay between private enforcement and regulatory enforcement, including regulatory and enforcement capability, will, tools, and the suite of remedies available for consumer redress. The ALRC recommends a further look at regulatory enforcement tools for consumer redress. Such measures can flow through into the scope and extent of potential liabilities in ways that could engage insurance cover.

We should care about regulatory design and settings. We do not have a true “class actions” framework. The New Zealand courts, in the absence of such a framework, interpret the existing “representative actions” rule flexibly, to facilitate group claims rather than constrain them, consistent with access to justice and efficiency rationales. However, parties and their advisers are, for the moment, left to derive the ground rules from a growing body of interlocutory judgments. This is inefficient and imposes additional costs upon litigants.

Reform is overdue – but equally it should not be rushed. Important policy considerations should be assessed properly. The NZ Law Commission is the right body to be looking such matters as it has the research capability, can consult widely, and is independent. The NZ Law Society has said publicly that it strongly supports the Law Commission project and has written to the Law Commission and Minister of Justice to express that view and a desire to see the reference reactivated as a priority project in the 2019/20 programme.

The six key points insurers should note from the ALRC review:

1. The types of claims in the Australian experience

Shareholder or “stock-drop” class action claims constitute over a third of all class action proceedings in Australia and have been the dominant type of action. That said, the types of claims mounted reflect a broad range of both commercial and non-commercial causes of action – shareholder and investor claims, cartel damages claims, mass tort claims, consumer claims for contravention of consumer protection law, environmental claims, trade union actions, claims under immigration legislation, and human rights claims.

Table 3.3: Types of class action claims filed in the Federal Court that were funded by litigation funders (March 2013-March 2018)

Type of claimNo. of proceedingsNo. that were funded% that received funding% of all funded class actions
Claims by shareholders3737100%52%
Claims by investors261765%24%
Consumer protection claims13431%6%
Product liability claims8450%6%
Mass tort claims8338%4%
Claims by employees/workers5240%3%
Claims by franchisees, agents and/or distributors3267%3%
Claims by real estate owners5120%1%
Claims by alleged victims of racial discrimination in non-migration proceedings3133%1%
TOTAL1087166%

Source: Professor Vince Morabito, Private correspondence (15 March 2018). Table 3.3 taken from ALRC Final Report, page 76.

2. A key proposal is that all class actions be initiated as open class

In order to improve access to justice and to return Australia’s class action regime to its original design, the ALRC recommends amending the Federal Court of Australia Act 1976 (Cth) and the Federal Court of Australia’s class actions Practice Note to provide that class actions must be initiated as open class. This is said to improve access to justice by enabling all victims of a civil wrong to participate in the class action, not just those who take active steps to join in.

The amendment to the Act would be supported by amendments to the Practice Note to set out the circumstances in which it may be necessary to close the class to facilitate a settlement and the criteria for the limited circumstances in which a class action that has been closed may be reopened.

In order to support an open class regime, the ALRC recommends that the FCA Act be amended to provide an express statutory power for the Court to make common fund orders.

Both issues – “opt-in” vs “opt-out” and common fund orders – are “live” in the New Zealand context currently.

Our High Court Rules Committee prepared a draft Class Actions Bill and accompanying amendments to the High Court Rules back in 2007. The Bill was based in large part on Australian federal and Victorian legislation. The Bill was provided to the then Minister of Justice in 2009, but has not progressed since due to other government priorities. The Class Actions Bill, as drafted, preserves the possibility for both “opt-in” and “opt-out” class actions, suggesting in its introduction that the majority of class actions might opt-out.

The NZ courts’ answer to date has been to permit “representative actions” to proceed on an “opt-in” basis, on the view that an “opt-out” (i.e. open class) regime requires legislation.

The policy debate remains live and the design choice will have significant implications. The High Court in a recent case referred to research showing that around 8% of class members might opt-out, whereas only around 39% might opt-in. The number of potential claimants plainly impacts on the quantum of potential exposure, which has implications for litigation funding. An “opt-out” model can offer more certainty and finality when looking to settle, than trying to resolve one “opt-in” class action if there is the looming prospect of another with a different set of plaintiffs. Design choice matters. The current draft Bill leaves both possibilities open.

The prospect of a common fund order being sought has been signalled in one recent case although the application has yet to be made and determined.

3. Several key recommendations address the rising incidence of competing class actions 

Multiple class actions increase uncertainty, cost and delay, making a sound public policy basis for procedural rules to permit only one class action with respect to a dispute to proceed, subject to the overriding discretion of the courts.

The prospect of multiple “closed class” class actions seems to us to be one of the obviously undesirable features of the current Australian regime, in that it permits overlapping claims against the same defendants arising out of the same circumstances. AMP, for example, was the subject of five separate competing open class actions arising out of matters raised at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. There have been shades of the same issue emerging here in New Zealand, with two group claims being run against James Hardie entities over cladding, albeit focussed on different geographic areas.

The ALRC has recommended that the Federal Court is given an express statutory power to resolve competing representative proceedings, backed by more detailed case management procedures in the Practice Note.

Such measures require quite detailed and prescriptive rules. It seems to us that the prospect of competing or overlapping class actions is to be avoided. There are learnings to be gained from the Australian experience in designing a framework for NZ that is fit for purpose.

4. One key recommendation would permit costs awards against insurers and funders

One of the key recommendations is that the FCA Act should be amended to expressly empower the Federal Court to award costs against third-party litigation funders and insurers who fail to comply with the overarching purposes of the Act.

This recommendation is said to seek to enhance the Court’s ability to supervise third-party litigation funders during proceedings, but the power would extend to insurers as well. The Court would be given an express power to impose costs on the litigation funder (and potentially insurers, if they are directing the litigation) personally if they act in a manner that frustrates the overarching purpose of the Act to facilitate the just resolution of disputed claims according to law and as quickly, inexpensively, and efficiently as possible.

5. The ALRC proposes a suite of recommendations to improve oversight of litigation funders, in lieu of a licensing regime

The ALRC acknowledges that litigation funding may improve access to justice. It refers to empirical evidence that a number of successful class actions would not have run without the funding provided by litigation funders. The ALRC also notes that, notwithstanding that contribution, there are inherent risks associated with litigation funders: risk that they might fail to meet their obligations under funding agreements; or use the Courts for improper purposes; or that they may exercise influence over the conduct of proceedings to the detriment of plaintiffs.

The ALRC proposes a suite of recommendations to improve the regulation of litigation funders. These are proposed in lieu of a licensing regime overseen by a statutory regulator.

The Report includes some finely calibrated recommendations designed to reduce the risk to consumers of litigation funding services if a funder does not meet its obligations, and to improve the security for costs position for respondents by including a statutory presumption that funders will provided security. It also makes recommendations to ensure court approval of the litigation funding agreement, which make clear the courts’ jurisdiction to review, amend, and set terms including commission rates, plus a further set of recommendations relating to the management of conflicts of interest.

All of this entails much closer scrutiny and supervision of third-party litigation funding arrangements, both at the outset of proceedings and on settlement of class actions – considerably more than in New Zealand currently. In fact, the New Zealand Supreme Court has emphasised that it is not the role of the Courts to “assess the fairness of any bargain between the funder and a plaintiff” or to act as “general regulators of litigation funding arrangements”, seeing these things as a matter for legislation.

6. The ALRC identifies regulatory collective redress, and the substantive law on continuous disclosure, for further review 

Noting the “enhanced consumer measures” introduced in the UK in 2015, and the ability in particular of the UK’s financial services and competition regulators to consider and oversee consumer redress schemes, the ALRC recommends that the Australian government review the enforcement tools available to regulators of products and services used by consumers in small businesses (including financial and credit products and services), to provide for a consistent framework of regulatory redress.

Such redress schemes can extend beyond the obvious measure (customer refunds) to prescribe processes to be followed in more complex cases where individuals’ entitlements and quantum nay need to be established and assessed and redress then made.

The ALRC also recommends that the Australian government commissions a review of the legal and economic impact of the operation, enforcement, and effects of continuous disclosure obligations. That goes directly to the legal framework underpinning the basis for shareholder class actions. That is of interest to New Zealand, with the NZX Listing Rules having been recently amended (with effect from 1 January 2019, with a six-month transition period) for better alignment with the current Australian rules that have been slated for review.

Group litigation, while still rare in NZ, is becoming an established part of the New Zealand litigation landscape. Recognising that reality, a well-designed framework to accommodate true “class actions”, with an appropriate balance between the rights of plaintiff groups and the rights of defendants, is needed.

When the NZ Law Commission does reinvigorate its project on class actions and litigation funding, it will find there is much to be gleaned from the ALRC’s Final Report. When it consults, insurers will want to be heard. They will no doubt have perspectives to add from their own experiences with the class action regimes in Australian and internationally.

Footnotes

1. Common fund orders typically require all members of a class to contribute equally to the legal and litigation funding costs of the proceedings regardless of whether the class member signed a funding agreement Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited (2016) 245 FCR 191, Pearson v State of Queensland [2017] FCA 1096 and Caason Investments Pty Limited v Cao (No 2) [2018] FCA 527.

2. Ross v Southern Response Earthquake Services Limited [2018] NZHC 3288. This appears to be the view of the Rules Committee also Consultation on Representative Proceedings (6 September 2018).

3. Ross v Southern Response Earthquake Services Limited [2018] NZHC 3288 at [22].

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